tv Whatd You Miss Bloomberg September 30, 2015 5:30pm-6:01pm EDT
costa rica. we will talk to the president. alix: we have to begin with the markets. i am breathing a sigh of relief now that third quarter is over. august wiped me out. a staggering statistic. joe: today was nice, a solid rally across the board. everything got clobbered. bonds and commodities and stocks all around the world, everything got clobbered. alix: u.s. stocks and bonds moving together. overall, it was pretty brutal. the nasdaq snapping a string of
10 straight quarterly gains. joe: stocks and bonds aiding slammed. cash outperforming assets in a way we have not seen in a long time. alix: for more perspective, julie hyman in the newsroom. julie: let's look at how ugly it was. we saw the worst quarter in four years. the dow down 8%. the s&p 500 and nasdaq down nearly 8%. a lot of this has to do with the concerns about global growth that really spread throughout financial markets. as joe pointed out, there were rarely places to hide. the worst performing groups that push stocks down, three groups, energy, materials, health care, the latter being as a result of the biotech selloff. hillary clinton's tweet about
capping drug prices, energy, materials, and commodities. this is the global commodity monitor. the quarter to date number. energy complex, gasoline getting the worst, down 33.5% in the quarter. then you have the metals. finally, you have the agricultural commodities. big decline for wheat, soybeans, sugar only down a small percentage. that's what you had in the commodities complex i want to take a look at the various currencies during the quarter. the yen was higher in the quarter, so there were places for relative safely. the euro finished slightly higher in the quarter as well. anything that had to do with a commodity-based commodity got knocked down.
the aussie dollar, the norwegian krone. take a look at volatility. you mentioned the vix, 33.5% gain. august, a record month for the vix. it had been 15. shares outstanding, market cap, etn, tracking a reverse vix. it shows it will come down. other measures show opposing views. we've had such a spike in the volume in the shares outstanding in this particular etn. joe: thank you for that.
alix: i want to take a deep dive into my terminal. this orange line is what the futures curve is now for the vix. the green line was the futures curve for the vix three months ago. you can see this huge jump in volatility, between 18% and 20%. a hugely steep curve, 26, 27, down to 22. joe: it really tells the story of the quarter. another chart, i want to go into my terminal, this is basically looking at the average yield on high-yield debt. this is a bloomberg high-yield index. it is now, yields are at the highest level since 2011. this is the story. spreads have blown out across high yields everywhere. we sell this in energy, now
elsewhere, people dumping everything. alix: perfect lead-in to our next guest. we want to bring in georgia from -- george from wells fargo. wells fargo. -- from wells fargo. thank you for being here. you take a look at the high yield, over 8%, talk about the contagion aspect we might see. >> that's a good point. the performance so far year to date, or in the third quarter, horrendous high-yield, down over 5% for investment glass, but investment-grade positive for the year. it is one of the minor bright spots as you look across capital markets and look for where positive total returns are being preserved. as you point out, credit markets are under pressure. you can see it in high yield, investment-grade come across the board, credit spreads are wider, bond yields have gone up dramatically, and an increasing number of issuers are having a harder time accessing the market.
big numbers would not suggest that, they would take you the market is wide open, on track for another record year of on is humans, but if you look at the underlying components of the market, there is a very clear segmentation of the house and s and have-nots. if you are a good, healthy company was stable earnings, you can brawl is much as you want. as soon as you show weakness or -- you can borrow as much as you want. as soon as you show weakness or a credit problem or managerial problem or a rating issue, the markets will push your borrowing costs dramatically so you can't borrow, or they might shut you out altogether. joe: what change? why the credit pressure? >> credit conditions have really tightened, starting to years ago, but since then it has been a slow-moving tightening of conditions. the fed has had a lot to do with it with their guidance towards raising rates, and you've also seen a concern about global growth, but i think the biggest issue is that corporate america has been on a borrowing binge
for five years, and the leverage to the amount of debt that companies are caring relative to the underlying cash flow are getting close, certainly cyclically peak levels. joe: you can see leverage back to its highest level in years. alix: if you take out energy, the leverage is still quite high. you'd think that would only apply to energy. what happens when we see an earnings peak, energy for example, two dollars per share? >> that is it. when leverage is at its peak at the best of times, you can have serious problems ever earnings rollover. -- if earnings start to rollover. that is the key focal point. marginal tightening of credit conditions become a problem as the higher borrowing costs slow earnings, and that learning based starts to drive does leverage numbers higher. there is a lot of sensitivity at the corporate level to marginal
changes in earnings. i think that is a big concern right now. those numbers that we look at, if you haircut earnings to recession-like levels, those leverage numbers go up to four times, which is really a high yield leverage number. the typical high-yield company is leverage four times. the investment grade company is typically levered at 2.5 times. it is creeping higher. joe: something you mentioned as a source of stress was the fed. the fed is on hold. the markets aren't even protecting a fed rate hike. -- predicting a fed right -- fed rate hike. why do you think of non-rate hike was unhelpful? >> i think it is a good point. it has to do with clarity and sentiment. a lot of the cycle has been about verbal intervention and forward guidance and managing market expectations, and i think the fed had set the market up for the potential of a rate hike.
the failure to deliver that keeps the market confused. it's hard to take a meaningful risk position. in the credit perspective, that uncertainty has pushed down treasury yields, the 10-year is at 2.05 today. it incentivizes company to continue what they are doing, borrow more, by back more stock, by each other, push that leverage up, continue to push that leverage up. the cost of borrowing is relatively low, and you should continue to access it. it might be great for the economy, good for equity holders, not for creditors. joe: you will be staying with us. alix: guess how much money was pulled out of emerging markets this quarter? we have the huge number after the break. ♪
alix: i am alix steel. joe: i am joe weisenthal. "what'd you miss?" investors sold around $40 billion worth of emerging market assets, the worst since 2008, divided between debt and equity. alix: unreal. top headlines this afternoon. twitter has selected jack dorsey as permanent ceo, according to recode. dorsey has been doing the job on an interim basis for three months. dorsey will continue with square, where he is also ceo. joe: on the subject of new ceo, porsche appointed oliver bloom. the production chief will take over october 1. the management shuffle follows
revelations of an emission cheating scandal. 78-20 tally and endorsed an approach, house republicans want to use the must-pass measure to defund planned parenthood. those are some of your top headlines. joe: we are back with george from wells fargo. one of the things we are looking at is fallen angels, companies that are not junk, but could be. where are we with this? what we looking for? >> the credit cycle seems to have turned. we're seeing updates in terms of credit ratings. the mountain of debt sits at a cusp of investment-grade in high-yield has been on growing as downgrades come through.
we talked about energy, materials, and those sectors have come under pressure. you've got somewhere between $150 billion and $200 billion in debt at the lowest investment-grade rating and also on negative outlook by one of the ratings agencies, so there is a fair bit of fodder to see migrations going from investment-grade. joe: if it goes from junk, will it have a material impact? >> a part of it tends to get priced in before they get there. it rarely happens instantaneously. if you look at the shape of the bbb and the bb, it is pretty steep. a lot of cyclical companies set there, energies, materials, but it is never fully priced in, so the actual migration tends to lead to meaningful price, which can have a meaningful impact on
the impact of the size of the high-yield market, roughly a quarter the size of the investment-great market. when big investment-grade companies get downgraded, i like to think of it as an inverted pyramid, the price has to go down so that the point of bonds can be absorbed by the high-yield market, and that's from a technical standpoint, nothing about the credit worthiness of the company. alix: we've seen what's happened to glencore after worries about a downgrade. what does that wind up doing for default? >> default rates, they were running, trailing 12 months, running at 1.8%. to date that is up to 2.4%. alix: you have the actual default right, which is what you are talking about. you have a bear-pessimistic forecast, which could be as much
as 15 or 16? >> this is a moody's forecast. we are at taking of what the rating agencies uses a central forecast. they probably have the best data source to forecast the best-worst and base scenarios. i think it is a fair assumption to say that if default rates are at about 2.5% today, there is a good chance they will double over the next year, go up to about 5%. i think that is a reasonable forecast based on the amount of stretch in the market, where prices are, spreads are, and it would encapsulate what is going on in the more stress parts of the market. 5% is a meaningful increase from one year ago when we were at 1.8%. joe: what keeps me up at night? >> i do worry a lot about heavy bond supply.
our market is groaning under the weight of five years of nearly a trillion dollars of bond issuance, and we see that each successive deal is pushing spreads wider, in some instances pushing yields higher, not all, but some, and when i talk to clients and we look at the market, it is getting increasingly difficult to find that next marginal buyer. alix: good stuff. george, thank you. a pleasure talking to you. joe: coming up, one third of china's it, is in or near recession. we will explain who is saying is that and what it means. ♪
alix: i am alix steel. joe: i am joe weisenthal. "what'd you miss?" alix: one third of china's economy is at or in recession. joe: they are likely to experience three more years of slow growth. alix: this shows growth holding in exports, property investment, and fixed asset investment, and upstream industry. joe: this shows china's new economy, downstream fixed assets. china is not monolithic. alix: that is the point. they want to transition to consumer. costa rica is turning to china to get out of its fiscal deficit. the government has confirmed that it is in early talks for the sale of a $1 billion bond. joe: the president joins us now to discuss these talks and the moves being made to help cover a deficit that is projected to grow to 7% of gdp. thank you for joining us.
china, you're looking to borrow money from china, and china is a major export partner. >> china is a very important client of costa rica on computer parts. we don't have some of the commodity issues that other countries and latin america suffer. the bond sales, which are still on the way, it's not moving very fast. we are not pushing it too much to have an answer. we are in the midst of that preliminary stage. it is not the fundamental way to do with deficit. we are dealing with fiscal reform, expenditures, so we hope to fix the deficit using those tools, which are more reliable than bond sales. alix: you did announce you want to overhaul your tax system, 15% on capital grains, increasing the value added tax. what is it like to get these reforms through?
what kind of dealing do you have to do? >> no one wants to pay taxes. three governments have attempted to reform, but have not been successful. if you want to do the right and responsible thing, we have to clean up our finances now, otherwise by the end of my term, is going to be more difficult for anybody getting elected. we are dealing with a congress that is resisting, but we are talking. we see the two major tax proposals, the value added tax and income tax, and other smaller initiatives, some of which have been approved or will be approved soon, so i think the conditions, the political conditions, are there to have the fiscal reform approved in a few months. joe: one of the things we have seen globally is that every currency has fallen against the dollar. people view that as a key of recovery, economies become more competitive, but that has not
been the case and costa rica where the currency has held up well. does that concern you at all? would you like your currency to be weaker? >> the central bank has all the studies saying how much the money is worth. we haven't been required to by is much petroleum this year, and as much petroleum this year, and the prices have dropped on the one hand. we have been almost 100% renewable in our electricity production for most of this year because of the weather issues, a prolonged rainy season, and so if the currency is the evaluated, it will be for political reasons. i don't want to touch the macro economic forces, because i know that if something happens there unexpectedly or expectedly, like raising interest by the fed at the end of the year, then we will be in trouble. some of the sectors that are calling for devaluation for costa rica, like the exporters, tourism, two main areas in our
economy, have to realize that we have to be very careful in dealing with these things, because the unexpected impacts in the medium-term can be serious. alix: probably the only people to hear they don't want a weaker currency. when you look at your budget and the fiscal deficit widening, and also seeing a loss of jobs from until and bank of america, what do you need to do to provide growth and bring more jobs back? >> we have to deal with costs. the energy costs for the industrial sector is being lowered. we have a talented workforce. this is something that continues to be strong, even at times of strenuous fiscal circumstances, we are keeping our investment in education, and we are looking more eagerly for investments. then once again, we want to
alix: i am alix steel. joe: i am joe weisenthal. "what'd you miss?" alix: japan's survey, i gauged to measure manufacturing and business sentiment in japan. it is estimated to fall. it looks like japanese that will japan is on the verge of you will a recession. weak retail sales. a joe: it is a good survey. let's go to my bloomberg terminal, hurricane joaquin. we don't know what will happen. it is going through the bahamas. a this area is called the cone of uncertainty. will this make landfall or not. it could totally go out into the ocean. they could hit north america. it will be closely watched in the coming days. alix: especially by the oil in community. i mean me.
announcer: from our studios in new york city, this is charlie rose. tonight, part two of our conversation with vladimir putin. we talked of many things, he gave us an opportunity to have an engaging conversation about him and how he sees russia and russia's role in the world. he gave us an opportunity to have a further conversation after the interview when he invited it's in for appetizers, which turned into dinner.